Green Revolution in India Wilts as Subsidies Backfire

By Geeta Anand 

Akshay Mahajan for the Wall Street Journal

Pritam Singh, who farms 30 acres in Punjab, says the more desperate farmers become, the more urea they use. Overuse is stunting yields.

SOHIAN, India—India's Green Revolution is withering.

In the 1970s, India dramatically increased food production, finally allowing this giant country to feed itself. But government efforts to continue that miracle by encouraging farmers to use fertilizers have backfired, forcing the country to expand its reliance on imported food.

Popularized during the Green Revolution of the 1960s and 1970s, fertilizers helped boost crop yields and transformed India into a nation that could feed itself. But now their overuse is degrading the farmland. WSJ's Geeta Anand reports.

India has been providing farmers with heavily subsidized fertilizer for more than three decades. The overuse of one type—urea—is so degrading the soil that yields on some crops are falling and import levels are rising. So are food prices, which jumped 19% last year. The country now produces less rice per hectare than its far poorer neighbors: Pakistan, Sri Lanka and Bangladesh.

Agriculture's decline is emerging as one of the hottest political issues in the world's biggest democracy.

On Thursday, Prime Minister Manmohan Singh's cabinet announced that India would adopt a new subsidy program in April, hoping to replenish the soil by giving farmers incentives to use a better mix of nutrients. But in a major compromise, the government left in place the old subsidy on urea—meaning farmers will still have a big incentive to use too much of it.

The setback of the Green Revolution matters enormously to India's future. The country of 1.2 billion has positioned itself as a driver of global growth and as a significant commercial power in coming decades.

India likely will struggle to get there, and to return to the heady days of 9% economic growth, unless it figures out how to reinvigorate its agricultural sector, on which the majority of its citizens still rely for a living.

India's Food Crisis

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Akshay Mahajan for The Wall Street Journal

Bhupinder Singh's wheat yield on this 10-acre plot used to increase every year. But for the last five years it's been barely holding steady.

Agriculture has lagged behind other industries such as manufacturing and services, posting less than 2% growth in the latest reports on gross domestic product. And double-digit food inflation and declining yields spell less money in the pockets of rural Indians.

India spends almost twice as much on food imports today as it did in 2002, according to the Ministry of Agriculture. Wheat imports hit 1.7 million tons in 2008, up from about 1,300 tons in 2002. Food prices rose 19% last year.

To be sure, there are bright spots. Indian officials say the country may produce a record wheat harvest this year because of good weather conditions, unless rain or hail appear. The wheat harvest last year was better than expected, making some hopeful that the importing trend will be reversed.

Behind the worsening picture is the government's agricultural policy. In an effort to boost food production, win farmer votes and encourage the domestic fertilizer industry, the government has increased its subsidy of urea over the years, and now pays about half of the domestic industry's cost of production.

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European Pressphoto Agency

Indian commuters pass a rice shop as a shop keeper waits for customers in Calcutta, India, on Feb. 18.

Mr. Singh's government, recognizing the policy failure, announced a year ago that it intended to drop the existing subsidy system in favor of a new plan. But allowing urea's price to increase significantly would almost certainly trigger protests in rural India, which contains 70% of the electorate, political observers say.

The ministers of fertilizers and agriculture each declined requests for interviews.

"This is politically very difficult," says U.S. Awasti, managing director of the Indian Farmers Fertilizer Cooperative Ltd. and an informal adviser to government officials on the issue. The cooperative of 50 million farmers is the largest fertilizer producer in the country.

Farmers spread the rice-size urea granules by hand or from tractors. They pay so little for it that in some areas they use many times the amount recommended by scientists, throwing off the chemistry of the soil, according to multiple studies by Indian agricultural experts.

Like humans, plants need balanced diets to thrive. Too much urea oversaturates plants with nitrogen without replenishing other nutrients that are vitally important, including phosphorus, potassium, sulfur, magnesium and calcium.

The government has subsidized other fertilizers besides urea. In budget crunches, subsidies on those fertilizers have been reduced or cut, but urea's subsidy has survived. That's because urea manufacturers form a powerful lobby, and farmers are most heavily reliant on this fertilizer, making it a political hot potato to raise the price.

As the soil's fertility has declined, farmers under pressure to increase output have spread even more urea on their land.

Kamaljit Singh is a 55-year-old farmer in the town of Marauli Kalan in the state of Punjab, the breadbasket of India. He says farmers feel stuck. "The soil health is deteriorating, but we don't know how to make it better," he says. "As the fertility of the soil is declining, more fertilizer is required."

Increased demand and the soaring price of hydrocarbons, the main ingredient of many fertilizers, have taken India's annual subsidy bill to more than $20 billion last year, from about $640 million in 1976.

"The only way for agricultural yields to rise again is for the government to give farmers the incentives and the products to provide balanced nutrition to their crops," says Bimal Goculdas, chief executive officer of Dharamsi Morarji Chemical Co., one of the oldest fertilizer firms in India.

Agriculture experts say the country can't afford to wait. "There are big problems for the future of food production in India if these problems are not addressed now," says Reyes Tirado, an agricultural scientist and researcher for Greenpeace Research Laboratories, an arm of advocacy group Greenpeace International.

Under the new plan, the government will offer subsidies to fertilizer companies on the nutrients, such as sulphur, phosphorus and potassium, from which their products are made, rather than the fertilizer products themselves. The idea is to provide incentives for farmers to apply a better mix of nutrients.

Ultimately, the government plans to pay the subsidy directly to farmers, who will be able to buy products of their choice, including but not limited to urea.

Mr. Singh's government, however, said it would continue to subsidize urea, although it would set the price 10% higher.

Mr. Awasti, the fertilizer cooperative head, says the continuing urea subsidy means that farmers likely will still use too much of it. "The government is opting, as with any very difficult change, to adopt it in phases," he says. He says he believes that the urea subsidy will be dropped altogether in a year.

In the early years after India gained independence in 1947, the country couldn't even dream of feeding its population. Importing food wasn't possible because India lacked the cash to pay. India relied on food donated by the U.S. government.

In 1967, then-Prime Minister Indira Gandhi imported 18,000 tons of hybrid wheat seeds from Mexico. The effect was miraculous. The wheat harvest that year was so bountiful that grain overflowed storage facilities.

Those seeds required chemical fertilizers to maximize yield. The challenge was to make fertilizers affordable to farmers who lacked the cash to pay for even the basics—food, clothing and shelter.

Back then, giving cash or vouchers to millions of farmers living all over India seemed like an impossible task fraught with the potential for corruption. So the government paid subsidies to fertilizer companies, who agreed to sell for less than the cost of production, at prices set by the government.

The subsidies were designed to make up the difference between the production price and sale price—and to give the producers a 12% after-tax return on any equity investment.

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Akshay Mahajan for the Wall Street Journal

Bhupinder Singh's wheat yield has been barely holding steady lately.

Fertilizer manufacturing companies sprang up around the country. Nagarjuna Fertilizers & Chemicals Ltd. became one of the most profitable publicly listed companies in India.

In 1991, with the cost of the subsidy weighing heavily on India's finances, Manmohan Singh, then finance minister and now prime minister, pushed to eliminate it. Most fertilizer companies lobbied fiercely to retain the program. Many legislators also resisted ending the subsidy, fearing a backlash from farmers.

"The business interests lobbied and the business interests prevailed," says Ashok Gulati, the director in Asia of the International Food Policy Research Institute, a Washington-based think tank, who was involved in the policy discussions at the time. A last-minute compromise eliminated the subsidy on all fertilizers except for urea.

"That's when the imbalanced use of fertilizers began," says Pratap Narayan, ex-director general of the industry group, the Fertilizer Association of India.

With urea selling for a fraction of the price of other fertilizers, farmers began using substantially more of the nitrogen-rich material than more expensive potassium and phosphorus products.

In the state of Haryana, farmers used 32 times more nitrogen than potassium in the fiscal year ended March 2009, much more than the recommended 4-to-1 ratio, according to the Indian Journal of Fertilizers, a trade publication. In Punjab state, they used 24 times more nitrogen than potassium, the figures show.

"This type of ratio is a disaster," Mr. Gulati says. "It is keeping India from reaching the production levels that the hybrid seeds have the power to yield."

Producers of phosphorus-based fertilizers struggled. The government reintroduced a small subsidy on phosphorus fertilizers, but at times it didn't cover the difference between the government-set price and the actual cost of production. Dharamsi Morarji, one of the oldest fertilizer companies in India, closed some plants.

With scant domestic supply, India had to import seven million tons of phosphorus-based fertilizers last year, according to a senior official at the Ministry of Chemicals and Fertilizers.

Twenty-one percent of the urea, 67% of the phosphorus-based fertilizers and 100% of the potash-rich fertilizers sold in India in the fiscal year ended March 2009 were imported, according to a report this month from Fitch Ratings.

In the northern state of Punjab, Bhupinder Singh, a turbaned, gray-bearded 55-year-old farmer, stood barefoot in his wheat field in December and pointed to the corner where he had just spread a 110-pound bag of urea.

"Without the urea, my crop looks sick," he said, picking up a few stalks of the young wheat crop and twirling them in his fingers. "The soil is getting weaker and weaker over the last 10 to 15 years. We need more and more urea to get the same yield."

Mr. Singh farms 10 acres in Sohian, a town about 25 miles from the industrial city of Ludhiana. He said his yields of rice have fallen to three tons per acre, from 3.3 tons five years ago. By using twice as much urea, he's been able to squeeze a little higher yield of wheat from the soil—two tons per acre, versus 1.7 tons five years ago.

He said both the wheat and rice harvests should be bigger, considering that he's using so much more urea today than he did five years ago. Adding urea doesn't have the effect it did in the past, he said, but it's so cheap that it's better than adding nothing at all.

Land needs to be watered more when fertilizer is used, and Mr. Singh worries about the water table under his land. When his parents dug the first well here in 1960, the water table lay 5 feet below the ground, he says. He recently had the same well dug to 55 feet to get enough water.

"The future is not good here," he said, shaking his head.

Balvir Singh, an agriculture development officer for Punjab state, says it is as if farmers have become addicted to urea.

"One farmer sees another's field looking greener, so he adds more urea," he says. "A farmer will become bankrupt, but he will not stop using urea."

The fertilizer industry, which had lobbied to retain subsidies back in 1991, now sees them as a problem. That's because the government, trying to rein in spending, has been squeezing the reimbursement promised to fertilizer companies.

The subsidy theoretically gives companies a 12% profit margin. Today, in part because of the way the government calculates the subsidy, it offers the average company a 3% margin, according to K. Rahul Raju, joint managing director of Nagarjuna Fertilizers & Chemicals, and Mr. Awasti, the fertilizer cooperative head.

Farmers in Punjab are increasingly glum. "Farming is in shambles," said Kamaljit Singh, standing with fellow farmers in the courtyard of the village agriculture cooperative. "If we have to support our growing families and our increasing population on this land, we must get higher yields. Otherwise our families and our nation will suffer."